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THE market seems to have welcomed property developer Tropicana Corp Bhd's makeover as part of its aspiration to join the ranks of Malaysia's property heavyweights.
In the past few months, there has been a change in its top management, a rebranding exercise, private placements to foreign investors and the disposal of non-key assets to strengthen its balance sheet.
At the same time, the group's share price almost doubled from around RM1 early this year to RM1.80 during the week of Jun 17-23. The share price performance also reflects management's ambitious sales target of RM2 billion.
"Last year, we recorded sales of RM967 million. This year, we are quite confident we can double it to RM2 billion. This will come from our key developments in Greater KL, Penang and Iskandar Malaysia," group CEO Datuk Yau Kok Seng tells The Edge.
Yau took the helm of the company earlier this year, when it was still called Dijaya Corp Bhd, having arrived from Hong Leong Industries Bhd. He has commended the existing management team and stressed that one of his main priorities will be lowering Tropicana's gearing.
To lighten its balance sheet, the group plans to dispose of non-key assets. This year alone, it has disposed of 83.5 acres of land worth RM355 million. Including a private placement that raised RM154 million, the group's net gearing is now at 0.7 times.
"At the beginning of the year, our net gearing was about 0.9 times. As at March 31, we brought it down to 0.7 times. By the end of the year, we aim to bring gearing down to 0.65 times and further to 0.5 times by end-2014," says Yau.
Tropicana's disposals involve relatively small plots of land that have increased substantially in value over the years, but the group is not keen to develop these plots because of their size. For example, the group disposed of 6.41 acres of land in Tropicana for RM116 million or a whopping RM416 psf, compared with the RM6 psf it paid in 1991.
Some of the non-core assets being disposed of are part of the RM1.1 billion worth of assets that were injected into the group by major shareholder and executive vice-chairman Tan Sri Danny Tan last year. Yau points out that these assets have since been disposed of at a higher price.
Yau says it is much easier to add value to larger parcels of land, like the upcoming 1,172-acre Tropicana Canal City township in Shah Alam and the 88.5-acre Tropicana Metropark mixed-use development in Subang Jaya.
The group's private placement not only helped it to raise funds, but it also added diversity to its shareholder base, as it was mainly taken up by foreign institutions, says Yau.
The Employees Provident Fund also bought a 2.2% stake from Tan recently. Compared with a year ago, Tropicana's shares have been thinly traded, but that appears to be changing as the group brings on more institutional shareholders.
The group has another RM400 million worth of non-key land slated for disposal in the near future. In total, there are another RM2 billion worth of potential asset disposals over the next few years, not including the recent sale of raw land and private placement. For comparison, the group has more than RM1.8 billion worth of borrowings on its books as at March 31.
The potential asset disposals include RM883 million worth of investment properties, including Tropicana Plaza in Jalan Tun Razak, Kuala Lumpur, Tropicana City Mall in Petaling Jaya and the adjacent office block which are worth a total of about RM820 million. The remaining RM60 million involves smaller investment properties scattered throughout the country.
"We will let these properties go because it is not giving us excellent yield at this time. We want to focus on property development for the time being, so we will sell them to raise cash and strengthen our balance sheet. We want 85% to 95% of our earnings to come from property development," says Yau.
He notes that the group has already identified several parties keen on acquiring the said assets for investment purposes.
Potential REIT
Tropicana plans to get back into the property investment game in the future. It has set its sights on three key malls, with a combined net lettable area of three million sq ft. These malls are located in the group's billion-dollar developments in Tropicana Danga Bay in Iskandar Malaysia, Tropicana Gardens in Kota Damansara and Penang World City.
Yau plans to inject these malls into a closed-end fund or special purpose vehicle, and strategic investment partners will be given up to 49% equity interest. Once the malls are completed, tenanted and mature, they will be listed as a retail real estate investment trust (REIT), he says.
Yau says that in the long run, the group's ideal net gearing should be below 0.5 times, but points out that the aggressive deleveraging plans still provide for RM300 million worth of potential capital expenditure and landbanking activities.
"As we build profits, the reserves will be bigger and bring down gearing. Ideally, we would like it to be net cash but if you want higher returns on equity (ROE), you need a certain element of gearing. As long as we have a debt-service ratio of three times, we are good," says group managing director Datuk Dickson Tan.
Dickson, Tan's eldest son, is referring to the aggressive rollout of developments by the group across the country, with new launches every month.
For investors, the question that remains is the execution risk — whether or not Tropicana will be able to successfully unlock the value of its assets worth an estimated RM70 billion in gross development value (GDV).
The bulk of this comes from Tropicana Canal City, which has a projected GDV of RM20 billion. Will the market be able to absorb such a large pipeline of incoming projects?
"We are a multi-location developer, spread across hot spots like Penang, Klang Valley and Iskandar. This way, we have spread out our geographical risk. If you build in just one area, the population size there will naturally restrict demand for property," explains Yau.
The group will also attract customers by offering unique and innovative products like Tropicana Metropark, which has a lake in the middle surrounded by high-rise developments, much like Central Park in New York, says Dickson.
Dickson also highlights that the huge RM70 billion worth of developments will have to be carried out over the next 15 to 20 years. Canal City will only be launched in 2015, and will likely be undertaken by parcelling out smaller tracts to other developers to ease the burden on Tropicana, which will still act as the master developer.
This story first appeared in The Edge weekly edition of June 17-23, 2013.
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